Lumberscout: Forest Products Exchange

Abstract: Description of the Lumberscout platform, commodity tokenisation and future use cases.

DISCLAIMER: This White Paper is intended for distribution solely for information purposes. Lumberscout does not guarantee the accuracy of the conclusions and statements reached in this white paper. Moreover, this white paper is provided "as is" with no representations and warranties, express or implied, whatsoever, including, but not limited to: (i) warranties of merchantability, fitness for a particular purpose, title or non-infringement; (ii) that the contents of this white paper are free from error or suitable for any purpose; and (iii) that such contents will not infringe third-party rights. All warranties are expressly disclaimed. Lumberscout and its affiliates expressly disclaim all liability for and damages of any kind (direct or indirect, including loss of profit) arising out of the use, reference to, or reliance on any information contained in this white paper, even if advised of the possibility of such damages. Under no circumstances Lumberscout or its affiliates will be liable to any person, entity, partners, partner’s customer or end-users for any consequential, incidental, direct, indirect, special or punitive damages, including without limitation damages for lost profits, revenues, lost business or loss of use of products whether or not Lumberscout advised in this white paper or any of the content contained herein, that such damages will or may occur, and whether such damages are claimed based on breach of contract, negligence, strict liability in tort or any other legal or equitable theory. No action, regardless of form, arising out of this white paper may be brought against Lumberscout.

Summary of What We Are Developing

Lumberscout will use decentralized technologies to radically change the forest products sector; providing a safe platform for industrial producers, industrial consumers and industrial lenders to conduct business. Lumberscout’s implementation of distributed ledgers, commodity certifications, supply chain verification and efficient sales architecture will fundamentally change how forest products are financed, traded and certified. By harnessing disruptive technologies and establishing verification and governance frameworks, Lumberscout makes trustless, meritocratic consensus mechanisms possible on a global scale. The first steps towards these ends started with the creation of the Lumberscout smartphone app. Integrations of the functionalities outlined in the white paper will be built into subsequent version releases.

Market Size

Forest Products account for 5% of Gross World Product or 4 trillion USD in 2016. To put that in perspective, if you spent one USD per second, it would take you approximately 126,836 years to reach 4 trillion. According to U.N. statistics 33% of the world population currently depends on Forest Products for sustenance. Despite the importance of Forest Products to the global economy, novelties like “ride-sharing” services or “crypto-kitties” have distracted many to the fact that recent technological breakthroughs can entirely revolutionise established commodity-based industries. Lumberscout will redefine the Forest Products sector.

Disruption

Disruptive technologies redefine markets. Blockchain distributed ledgers have multiple use cases that can disrupt the Forest Products sector. Cash-Against-Documents (CAD) transactions are just one standard industry practice that will be made obsolete by distributed ledgers. Buying, selling, financing, transportation, insurance and certification of Forest Products are other important areas for change. Instead of relying on local banks, borrowers have the possibility to obtain loans from the emergent crypto lending market and can finalise purchasing contracts in crypto-currencies. Lumberscout will be the catalyst that empowers users to conduct business using mobile handheld devices at any time, from anywhere in the world.

Tokenization of Forest Products

As the crypto-economy grows, so too does the demand for the tokenisation of commodities. The blockchain, much like containerised shipping, has redefined global trade. However, the practical aspects of verification at the beginning stages of the distributed ledger process requires close attention and new management infrastructures. Sending containers around the world is a logistic feat, but without verifying the contents, value cannot be established. Lumberscout will implement verify and track procedures throughout the harvesting, production, transportation and manufacturing stages. By reliably tokenizing commodities, Lumberscout will connect the crypto economy with the Market of Things (MoT).

Increasing the Liquidity of the Forest Products Sector

The Forest Products industry is typically cash strapped to the point that there is no extra capital to make needed investments in machinery, automation or sustainability. Especially productions in developing nations that want to modernize and become responsible producers, access to funds and basic safety equipment are sorely lacking. Small loans can mean the difference between crushing poverty and lives filled with stewardship and meaningful work. By facilitating reputation-based lending with decentralized credit ratings, consisting of data on trade performance and data feeds from service providers such as credit institutions and social media, Lumberscout will provide investors with the information they need. Moreover, services such as Bloom would be used to broadcast defaults to centralized credit scores.

Empowering Crypto Lenders

By providing secured assets with the use of ERC20 tokens as collateral to major crypto lenders like SALT, ETHlend, et al. — as well as private lenders — Lumberscout’s system of verification will be a pivotal actor in the tokenised collateral chain. Forest Products manufacturers that adopt Lumberscout’s verification program will gain access to heretofore impossible liquidity. For example, LUMBER token holders can exchange them for commodity tokens on the platform, but are not required to do so. They can be held as collateral. Instead, the applicant can pledge his tokens to receive funds. In this way, commodity tokens can be used to secure loans and can be sold off if required.

Increasing Sales Efficiency

Lumberscout’s bidding, personal messaging system and social-media distributed inventory databases, funnel activity into formalised contracts with maximum efficiency. Bids can be made specifying quantities, grades, delivery and payment terms. At the end of the bidding process, both parties are sent copies of the contract and can download them from user account archives, where they are saved and timestamped. Each contract and their subsequent rating will form an irrevocable part of user reputation. These processes utilise technology to save time and reduce errors.

Reducing Fraud

In addition to Lumberscout’s own credit rating system, Lumberscout will, on behalf of the user — if so desired — allow their scores to be broadcast to other decentralized credit rating institutions. Additionally, oracles can be used to provide feeds from social media for creating a more complete credit profile. In this way Lumberscout will act as a third-party repository of unalterable data that will serve lenders, financial markets and trade partners in perpetuity. Adoption of Lumberscout’s rating system will become more valuable to sellers, buyers and lenders over time as its data grows and its predictive algorithms are refined.

Institution of Certification Processes

To insure conformity to Lumberscout guidelines and mandates, certification and auditing procedures will be implemented on multiple fronts. Self-audits will begin the certification process and verified by auditors specifically to establish grading accuracy, commodity volumes and other factors such as best forestry practices. Certification is a necessary prerequisite for secure decentralised participation in the MoT.

Collateral Management (risk mitigation)

Lumberscout will institute a collateral management system to limit loss in cases where collateral value drops below a certain threshold, the borrower must increase their collateral or the lender can call the collateral and sell it on the market. Alternatively, collateral swapping will be introduced where the lender can swap the collateral for a fee, to less volatile tokens, instead of selling.

Simplified User Experience

Lumberscout is developing a more user friendly experience for the app including social media integration, syncing of inventory systems and intuitive lending and supply chain interfaces. As Dieter Rams put it: “Good design is as little design as possible”. Lumberscout’s user experience must be second nature: useful, unobtrusive, thorough, honest, reliable.

Competitive Bidding

Lumberscout bidding functionality will be expanded from industrial commodities like logs, lumber and machinery to service providers: insurance, lending, freight forwarders and shipping. This will create competitive market conditions. For example, lenders can participate in interest rate bidding auctions; logistic companies can bid on freight routes and insurance companies can bid based on supplier risk profiles.

Currency Exchange Risk Management (FIAT pegging) and Atomic Swaps

Exchange risk exposure is potentially disruptive if a borrower borrows 1 ETH when the ETH price is at USD 15000, but then rises to 30000 or falls back to 1000. Such a situation can be solved by providing FIAT based loans where the loan amount is represented in FIAT currency, even though the transaction is conducted in ETH. FIAT pegging also creates wider opportunities for lending and commodity investment purposes.

Lumberscout will be among the first to develop artificial intelligence (AI) protocols for assessing ledger data to predict credit risk. Such AI bots will harvest and filter data and calculate early warning signals according to established financial models to better aid lender decision-making. This will provide ample room to cooperate with Gnosis and Augur to develop better indicators of future events.

Supply Chain Integration

Lumberscout will be at the forefront of integrating blockchain based logistics into the Lumberscout platform. Earlier this year Maersk shipping (the world’s largest container shipping line), announced that it was cooperating with IBM to put all of its shipping on the blockchain within two years. Similar adoptions of blockchain technology will take place in domestic trucking operations. Lumberscout will be the app that aggregates these service providers and validation nodes into one application. This will increase transparency and security for buyers, sellers and lenders.

Unknown to many outside the Forest Product sector, there are a variety of companies offering forest certifications. The problem with these companies is that they have become for-profit bureaucracies that obliquely follow their mandate. Within the context of the Lumberscout DAO, holistic approaches to sustainability are possible. Once industry consensus is reached, such certifications can be put into practice.

DAO Governance

Parallel to developing better inventory visibility, sales and supply chain infrastructure, Lumberscout will implement a DAO based delegate system for global governance and the continuous evolution of industry standards and practices, such as: forestry certification, grading standardisation, collateral management and codification of international regulations. Proper DAO governance can solve problems before they devolve into costly disputes that end up in prolonged, centralised arbitration. The recent softwood trade dispute between USA and Canada is one recent example that can be expected to repeat itself unless better inter-trade regulations and decentralised consensus mechanisms are put into place. With DAO appointed regional delegates and transparent voting mechanisms the responsibilities of stewardship and consensus can organised regionally and globally. By building delegations, Lumberscout can impactfully improve sustainability and the global trading environment of Forest Products.

Onboarding Insurance Providers

Lumberscout will work together with insurance providers to streamline coverage with the help of programmed contracts and distributed ledger technology. The Forest Products sector relies considerably on insurance to underwrite risk. Lumberscout can provide the insurers the information they need to assess risk accurately. Lumberscout can provide insurers critical actuarial data needed to calculate appropriately in each use case. Using AI and Big Data for insuring credit risk. Lumberscout will provide a protocol for AI developers to use ledger transaction data to provide insurance carriers with actuarial inputs. The aim is to create a revenue stream for AI developers and to incentivise creating bots with greater predictive power. Competition in this area would lower insurance policy costs. Moreover, these bots could be used to assess credit risk and subsequently credit insurance for trades.

Lending Based on Reputation

A reputation system is a convenient way to establish trust between the buyers, sellers and lenders. By creating a data repository of identities, transactions and their subsequent cross-evaluation by the parties involved and making the satisfaction or dissatisfaction of the involved parties a matter of record, Lumberscout’s data will serve the community by establishing reputations based on past behaviour. By using reputation, Lumberscout will reduce the risks to buyers, sellers and lenders alike.

Logistics Partnerships

Lumberscout will develop auction-like bidding functionality to provide better freight rates. The lowest freight rate bid will win the auction and the programmed contract will accept that particular shipper as the funder of that programmed freight contract. Such bidding will provide the most competitive rate for the shippers since unlimited forwarders can participate on the bid. This can be applied to domestic trucking companies and scale up to include ocean shipping.

Programmed Contracts

Collateral enables secured trading and lending. The Lumberscout system allows collateral to be applied to conditional programmed contracts. If one of the parties does not perform their part according to the contract, funds can be returned. For example, a buyer applies pre-payment to a purchasing contract contingent on it shipping within two weeks. The seller has the surety that he will be paid, prompting him to act. The buyer’s risk of non-shipment is mitigated. If the conditions are not met he is refunded his deposit. The same principle can be applied between lenders and borrowers.